Global Economy in 2008

Though the subprime mess and rising oil prices slammed the U.S. economy during much of 2007, other emerging markets -- especially China and India -- seem to be on a roll. China's growth rate of more than 11% is likely to continue, and India, too, should be able to sustain a high rate of GDP growth, even if it slows from last year's 9%. Latin America, meanwhile, is cautiously optimistic but could see a moderate decline in 2008.

How best to describe the outlook for the U.S. economy and financial markets in 2008? Uncertain at best.

High oil prices and fallout from the subprime mortgage debacle continue to threaten the economy and financial markets, according to several Wharton faculty members. Although none think a recession is guaranteed, all agree that even if a recession is averted, economic growth will be agonizingly slow. "There are a lot of unknown unknowns out there," says management professor Marshall W. Meyer.

Perhaps surprisingly, none felt the U.S. presidential campaign will have much effect on the markets. As finance professor Jeremy Siegel put it, none of the candidates save John Edwards has a strongly anti-business platform, and the former North Carolina senator appears less and less likely to become the Democratic nominee. None of the others "are significantly anti-market. The market could live with Hillary or Obama, and of course it could live with any of the Republicans," he notes.

Siegel is more optimistic than many experts, thinking that the U.S. economy will slow during the first half of the year but will avert a recession and start to rebound in the second half. The chief threat, he says, is high oil and food prices, rather than the housing slowdown. "We've adapted pretty well to $3 [per gallon] gasoline, but $4 would be quite difficult," Siegel says.

"Forecasters are split about 50-50 on whether there's going to be a recession or not," he adds. "I think there's some predominance among professionals that there isn't [going to be a recession]. I'm in that optimistic group."

Siegel expects gross domestic product to grow at an annualized rate of 1% to 2% during the first half of the year, and perhaps 3% in the second half. "I'm predicting that we could rise to 3% in the second half of the year because I think that by the middle of this year, housing will hit bottom," he notes, adding that the economy could fall into recession if rising oil and gasoline prices dampen consumer spending.

As for the credit crisis, "Once this subprime crisis is sorted out, it will not be as bad as the market fears," Siegel says, predicting that the number of foreclosures and the losses in mortgage-backed securities will be smaller than many forecasters expect. "There is tremendous fear in the market today about what those losses are," he suggests. He thinks the market has overestimated the number of securities that will default on payments promised to investors.

Siegel did note that the financial markets were jarred by a recent report that unemployment in the U.S. had risen in December to a two-year high of 5%, but he doesn't think the situation will get worse, adding that the number of people with jobs had continued to rise. "The unemployment rate seems very anomalous to me. It's not likely to stay that way next month.... You've got to do some smoothing on that [statistic]. My feeling is it will go down to 4.9% or 4.8% once we get the January data."

Siegel adds he is "fairly optimistic" about the stock market, predicting a 10% to 12% return for broad market gauges like the Russell 3000 and Standard & Poor's 500.

The Indian economy is likely to face pressures in 2008, and its 9% growth rate of recent years will feel the pain of a U.S. slowdown, according to economists and investment managers who spoke to Knowledge@Wharton. Led by rapid growth in Asia, India's fortunes are certainly getting increasingly "decoupled" from the U.S. economy, but the country faces other challenges. Inflationary pressures loom, but opinion is divided on whether that could force interest rates to rise. The increasing cost of capital is already beginning to sap retail and corporate borrowing appetites around the country.

"India has a 50% chance of suffering a painful downturn in 2008-09, a 30% chance of a mild downturn and only a 20% chance of continuing with rapid 9% growth," says Swaminathan S. Anklesaria Aiyar, a well-known Indian economist and columnist. Aiyar says he limits the chance of a painful downturn to 50% because, like many other advocates of the so-called "decoupling" theory, he sees a U.S. slump impacting India to a lesser extent now than it might have in earlier years.

Aiyar cites the International Monetary Fund's World Economic Outlook (October 2007), which has marked down its global growth projection for 2008 by almost half a percentage point to 4.8%, while that for the U.S. is down a full percentage point to 1.9%. It is less harsh on prospects this year in Asia, where it says "growth may moderate somewhat;" in 2007, China and India posted 11% and 9% rates, respectively.

But "it could be extremely painful" if India were to slow from 9% to 7% this year, says Aiyar. He recalls how a similar two-percentage point drop in India's growth rate in the years following the 1994-1997 Asian financial crisis flattened industrial growth. "Exports collapsed, any number of plants set up with a view to exporting in effect went bust, and the banks lending to them went bust." However, he sees Indian companies much more resilient to a downturn these days, with lower borrowing costs and healthier debt-equity ratios.

Ruchir Sharma, the New York City-based head of global emerging markets at Morgan Stanley Investment Management, says he doesn't buy the theory that India's growth rate could dip by two percentage points. He is "bullish on India" this year because he sees "quite a large opportunity" in investing there relative to his capital pool. Sharma oversees equity investments totaling some $35 billion in emerging economies, of which India accounts for a little less than $5 billion.

In terms of absolute allocations, India shares second place along with Russia and Brazil in Morgan Stanley's emerging market investments, after China, says Sharma. On the question of increasing allocations to India this year, he says his fund is already "overweight" on India with more than a tenth of total funds invested there.

Indian finance minister P. Chidambaram has also fueled optimism by hinting at income tax cuts when he unveils his annual budget in February. Chidambaram is encouraged, says Aiyar, by the dramatic growth in direct tax collections. They jumped 40% in 2006, and are expected to be 42% higher in 2007, or by Rs. 90,000 crore ($24 billion).

Interestingly, the higher tax collections are driven not just by better compliance and improved tax administration, says Aiyar. He is convinced that many businesses are bringing onto their books a lot of "black" money -- or funds that are not accounted for -- with the lure of initial public offerings. "The IPO price is a certain multiple of the book profits," he says.

In Argentina, the prediction is for "6% growth in 2008, below the 7.5% recorded in 2007, and for 5.5% growth in Chile. He expects growth of 5.5% in Uruguay, 3.5% in Paraguay, 7.3% in Peru, 4% in Bolivia, 3% in Ecuador, 4.3% in Brazil and 5.8% in Colombia. In Venezuela, he projects growth of 7% as a result of large salary increases and high governmental spending. He also forecasts that Mexico and Central America will suffer a drop in their growth rate to 4%, "as a result of a slowdown in external demand related to the behavior of the American economy, as well as to declining domestic demand and restrictive monetary policy."

IMF: Economy Will Slow In 2008, But No Recession
By Christopher S. Rugaber, AP Business Writer
Manufacturing.Net - January 29, 2008

WASHINGTON (AP) — The world economy will slow significantly in 2008 but the United States will avoid recession, the International Monetary Fund forecast Tuesday.
Slower U.S. growth and credit market turmoil stemming from U.S. housing market woes also will hinder the global economy, the IMF said.

''The five-year long global expansion has begun to moderate in response to the spreading effects of financial disruptions,'' Simon Johnson, director of the research department at the IMF, said during a press briefing.

U.S. economic growth will slow to 1.5 percent in 2008, Johnson said, down from an estimated growth rate of 2.2 percent in 2007. The 2008 projection is lower than the IMF's October 2007 prediction of 1.9 percent.

The IMF now sees world economic growth slowing to 4.1 percent this year, down from 4.9 percent in 2007.

The reduction is the second cut in a row in the IMF's estimate of global economic growth for this year. Last July, the IMF estimated the world economy would grow 5.2 percent in 2008, and in October the estimate was reduced to 4.4 percent.

The estimates were included in an update of the IMF's World Economic Outlook, which is issued twice a year. The next update will be issued in April.

DETROIT (AP) — Chrysler LLC is offering buyouts of up to $100,000 (euro67,773) to hourly workers at 11 of its U.S. facilities as part of its goal to cut up to 21,000 manufacturing jobs, or nearly half its U.S. hourly work force, a company spokeswoman said Monday.

Earlier this month, Chrysler made offers to workers at four assembly sites in Toledo, Ohio; St. Louis North and South in Fenton, Missouri; Belvidere, Illinois; and Jefferson North in Detroit.

On Monday, the offers were extended to seven additional sites in Michigan, including assembly plants in Warren and Sterling Heights; the Detroit Axle, Mount Elliott Tool and Die, and Mack Avenue Engine plants in Detroit; an engine plant in Trenton and a vehicle test center in Sterling Heights. Chrysler also gave the offer to 110 employees at the company's Auburn Hills headquarters who are in an hourly bargaining unit but are paid salaries.

A truck plant in Warren is down this week but is expected to get the same buyout offers when it resumes operations.

Chrysler spokeswoman Michelle Tinson said the company has eight other U.S. facilities that are still awaiting buyout offers. The company is working with the United Auto Workers union to determine when those will be introduced.

Chrysler has approximately 45,000 UAW-represented hourly workers.

Chrysler is in the midst of a restructuring after a majority stake in the automaker was sold last summer to private equity firm Cerberus Capital Management LP. The auto company announced in November it planned to cut up to 12,000 jobs, including 8,000 to 10,000 hourly and 2,000 salaried jobs.

The cuts came in addition to 13,000 layoffs Chrysler announced last February, including 11,000 hourly and 2,000 salaried workers. Around 6,400 hourly workers had left the company under than program as of June, Tinson said, but additional retirement packages could be rolled out under that program, which was scheduled to run through 2009.

Employees have until Feb. 18 to decide whether to take the latest offers. Some workers could leave by April, but the dates they will leave the company will vary by worker and by plant.

Under Chrysler's current offer, employees who are on temporary or indefinite layoff or have at least one year of service can get up to $100,000 (euro67,773) and six months of health benefits if they agree to cut ties with the company. Retirement-eligible employees can get a $70,000 (euro47,441) lump-sum payment as an incentive to retire with a regular pension. A separate program gives workers close to retirement their full benefits if they retire early, but they get no lump-sum payment.

Ford Motor Co. and General Motors Corp. are offering similar buyouts and early retirement packages to cut costs and reduce production capacity to match sagging U.S. demand.

On Thursday, Ford announced it will offer buyouts to all of its 54,000 UAW-represented employees. Ford is offering workers up to $140,000 (euro94,883) to sever ties with the company, or incentives of $50,000 (euro33,887) for nonskilled workers and $70,000 (euro47,441) for skilled workers of retirement age. Ford said workers will begin leaving the company in April.

GM has offered early retirement packages and buyouts to 5,200 UAW hourly workers at service and parts operations but has yet to make similar offers to workers in assembly and parts plants. GM is close to agreeing with the UAW on the second round of buyouts and hopes to announce details next month, GM spokesman Dan Flores said. Once the second round is announced, the buyouts are expected to cover 46,000 workers. In the first round, GM is offering workers $140,000 (euro94,883) to sever ties with the company and a $35,000 (euro23,721) lump-sum bonus for retirement-eligible workers.

TERRE HAUTE, Ind. (AP) — Drug maker Pfizer Inc. will lay off 660 workers at its Vigo County plant by midyear and possibly cut the remaining 140 positions later, dealing a setback to the state's life sciences jobs initiative.

Monday's announcement came as little surprise after the New York-based company placed 600 workers on paid leave in October when it decided to stop selling the plant's top product, the inhaled insulin Exubera, because of disappointing sales.

Those idled workers and others — 660 in all — will formally lose their jobs over three months beginning in March, leaving just 140 employees to make two other products, the low-selling antibiotics Unasyn and Cefobid.

''Due to declining demand for those products, the company is looking into the ongoing prospects of that business,'' the company said in a news release. ''Pfizer is still evaluating long-term options for the site.''

The announcement of the layoffs marked a stunning turnaround from March 2006, when Gov. Mitch Daniels hailed Pfizer's decision to hire 450 more workers in Vigo County to produce Exubera as proof of Indiana's progress in ''becoming a premier destination for companies in the life sciences sector.''

Daniels wasn't available for comment Monday on the Pfizer announcement, leaving it to his press secretary, Jane Jankowski, to provide reaction.

''I know Pfizer had great hopes for the product, so it certainly is disappointing news,'' she said.

Jankowski dismissed the notion the Pfizer cuts were a setback for the state's life sciences jobs initiative. She noted several other large job commitments in life sciences: Medco Health Solutions Inc.'s decision to build a 1,300-job automated pharmacy, Arcadia HealthCare's decision to create 400 jobs by 2010, and WellPoint Inc.'s creation of 1,200 pharmacy jobs by 2011, all in the Indianapolis area.

''We have a lot of real good, positive momentum,'' Jankowski said.

Pfizer had invested more than $300 million in the plant just south of Terre Haute since 1999 as it ramped up production of Exubera. However, the drug never met expectations and Pfizer pulled the plug on it last October just months after expanding its sales effort beyond specialists to primary care doctors.

The Indiana Economic Development Corp. offered Pfizer nearly $9 million in tax credits and training grants two years ago for the expansion, but the company never followed through with the necessary paperwork, said the agency's director, Nate Feltman.

''The state is not out anything,'' Feltman said.

Rod Henry, president of the Terre Haute Chamber of Commerce, said Pfizer has been among the largest employers in Vigo County and one of its leading corporate citizens for the past 60 years. The Terre Haute area will be hard pressed to find 600 more jobs of equal quality, he said.

''We'll bounce back. What we've got to see what we can do as a community is basically to make sure to stop the loss of Pfizer,'' Henry said.

Workers learned of their impending layoffs in meetings Monday morning. Frank Foley, the plant's senior manager, said Pfizer will provide transfer opportunities, severance pay, career and retirement counseling and other aid for the displaced workers.

WASHINGTON (AP) — Orders to factories for big-ticket manufactured goods soared in December by the largest amount in five months, welcome news for an economy buffeted by talk of recession.

The 5.2 percent increase in orders was a surprise finish for the manufacturing sector at year's end — a segment of the economy considered to have had a poor year.

The increase in orders, as reported Tuesday by the Commerce Department, was far larger than had been expected. The strength came from a big increase in demand for commercial aircraft, but even excluding the transportation sector, orders posted a solid 2.6 percent gain.

The December orders increase was more than double what had been expected. Analysts were looking for a much weaker performance, given that a key gauge of manufacturing activity had fallen to the weakest reading since April 2003. The Institute for Supply Management manufacturing index dipped to 47.7 for December. Any reading below 50 is considered recession territory for manufacturing.

The unexpectedly big jump in December closed out a lackluster year for manufacturers. Orders for the total year managed to rise by just 0.97 percent following much bigger increases of 6.31 percent in 2006 and 9.45 percent in 2005. It was the poorest showing since orders actually fell by 3.17 percent in 2002, a year when the country was still struggling to emerge from the 2001 recession.

The strength in December was led by an 11.3 percent rise in demand for transportation products. That reflected an 11.3 percent jump in orders for commercial aircraft which offset a 2.3 percent fall in demand for autos and auto parts as automakers continue to struggle with weak demand as gasoline prices have surged.

The increase in demand for commercial aircraft had been expected, given that Boeing reported receiving orders for 277 aircraft in December, up from 177 in November. The widespread strength outside of transportation was a surprise although economists cautioned that it may not last given the weakening overall economy.

Ian Shepherdson, chief U.S. economist for High Frequency Economics, predicted that the orders reports in coming months will likely ''turn rapidly south'' as the slowdown depresses manufacturing activity.

A key category of business investment, non-defense capital goods excluding aircraft, rose by 4.4 percent in December, the first increase in this closely watched category since September, and the biggest increase since last March.

The unexpectedly big jump in December closed out a lackluster year for manufacturers. Orders for the total year managed to rise by just 0.97 percent following much bigger increases of 6.31 percent in 2006 and 9.45 percent in 2005. It was the poorest showing since orders actually fell by 3.17 percent in 2002, a year when the country was still struggling to emerge from the 2001 recession.

The strength in December was led by an 11.3 percent rise in demand for transportation products. That reflected an 11.3 percent jump in orders for commercial aircraft which offset a 2.3 percent fall in demand for autos and auto parts as automakers continued to struggle with weak demand amid soaring gasoline prices.

A key category of business investment, non-defense capital goods excluding aircraft, rose by 4.4 percent in December, the first increase in this closely watched category since September, and the biggest increase since last March.

The report of the strong showing in December came at a time of growing concern that the country could be slipping into a recession as the economy has had to sustain a variety of blows from a steep slump in housing to soaring energy costs and a severe credit squeeze. The problems have, at the same time, roiled global financial markets.

The Federal Reserve was beginning a two-day meeting Tuesday, and the expectation is that the central bank will cut rates by perhaps a half percentage point as further insurance against a recession. Last week, the Fed slashed a key rate by three-quarters of a point, the biggest reduction in more than two decades and its first rate change between meetings since the September 2001 terrorist attacks.

The government will issue its first look Wednesday at the overall economy's performance for the final three months of 2007. Many economists believe that will show the gross domestic product (GDP) was rising at an anemic 1.2 percent annual rate in the October-December quarter, a significant slowdown from the 4.9 percent growth rate of the July-September period.

The report on durable goods showed that the strength was not just confined to the aircraft sector. Strong gains were also reported in demand for fabricated metal products, machinery, computers and communications equipment.

NEW YORK (AP) — Chinese chip maker Semiconductor Manufacturing International Corp. said Tuesday that it intends to start a new integrated circuit production project in Shenzhen, China.

SMIC said it will register an independent legal entity called the Semiconductor Manufacturing International (Shenzhen) Corp. Ltd., which will build an integrated-circuit technology research and development center. The entity will also set up an 8-inch wafer production line and a 12-inch chip fabricating plant.

SMIC said the 12-inch chip fabricating plant will have an advanced process technology licensed from International Business Machines Corp.

SMIC expects work on the project will begin in the first half of 2008.

-------------------------------------Looks like the effect of this will not be apparent in USA for several years. -KMG

PITTSFIELD, Maine (AP) — Nearly 150 people will lose their jobs when a shoe factory in Pittsfield closes.

SAS Shoemakers blames a reduced demand for penny loafers and other styles produced in the central Maine plant for the closing, which is scheduled to be complete by the end of the summer.

The San Antonio-based company says it makes sense to move the Maine production to its expanded facilities in Texas. A spokeswoman says the company's not abandoning the Maine jobs, but it's transferring them to Texas.

SAS plans to lay off groups of workers starting the week of April 14th. Some Maine employees may receive transfer offers.

More of this is yet to come as this type of manufacturing moves to China - KMG

WASHINGTON (AP) — Tesla Motors received a waiver from the government on a federal air bag standard Monday, bringing it a step closer toward the production of its all-electric Roadster later this year.

Tesla, based in San Carlos, Calif., has pre-sold all of its 2008 Tesla Roadsters, a fully electric sports car that sells for $98,000. The company expects to begin deliveries in the first quarter of this year but needed the waiver to be able to sell in the United States.

The National Highway Traffic Safety Administration said it would give the company a three-year exemption from the advanced air bag rule, noting that Tesla tried to comply with the requirements and would still have standard air bags on the vehicle.

Based on information provided by the automaker, NHTSA estimates the waiver will cover 3,825 Roadsters, including 625 vehicles this year and 1,600 in each of the following two years.

NHTSA called the Roadster ''one of the most advanced full electric vehicles available'' and said the ''public interest is served by encouraging the development of fuel-efficient and alternative-fueled vehicles.''

The federal agency said Tesla posted operating losses of $43 million from 2003-2006 and that without the waiver, Tesla would ''have to cancel its pending development of an electric-powered sedan, and would ultimately have to terminate its operations.''

Tesla said in a statement last week that it had received all regulatory approvals to import the first production Roadster for sale in the United States and production would begin March 17.

Tesla has based its Roadster on the two-seat Lotus Elise sports car, which also could not comply with the advanced air bag rule and received an exemption from NHTSA in August 2006. The vehicle will be manufactured at a Lotus factory in Hethel, England, under Tesla's supervision.

Tesla also has announced plans to produce at least 10,000 all-electric, five-passenger sedans a year at a plant in Albuquerque, N.M., beginning in the fall of 2009.

LONDON — European leaders called Tuesday for greater transparency in credit rating agencies and a better way to predict global financial downturns.

"We need a better early warning system for the global economy and we need to ensure that its warnings have the force and authority to ensure that they are acted upon," Brown told reporters after a meeting of European leaders at his 10 Downing Street office.

Brown hosted French President Nicolas Sarkozy, German Chancellor Angela Merkel, Italian Premier Romano Prodi and European Commission President Jose Manuel Barroso for talks on the international credit crunch.

In a joint communique read by Brown, the leaders called for improvements in the information carried by credit rating agencies, prompt and full disclosure of banks' write-offs, and called on the EU to ensure transparency in the way that increasingly complex investments were valued.

The group said it hoped the financial market would act to regulate itself, but warned of government intervention should it prove incapable of doing so.

They noted the need to improve management of their economies' exposure to liquidity crises. The communique called on the Basel Committee of Banking Supervisors to propose new standards to improve its management of liquidity risk.
They also called for reform of the International Monetary Fund, saying the institution should put forward proposals on how to strengthen its international economic oversight.

Shares in Asia fell 3 percent on Monday as concerns over the health of the global economy returned to haunt stock markets, sending investors to seek the relative safety of government bonds.

European stock markets also fell in early trading on U.S. recession fears, with the FTSEurofirst 300 index of top European shares down 1.4 percent. U.S. stock futures pointed to a lower opening for Wall Street.

"The sell-off is hitting all sectors, regardless of each company's earnings and outlook," said Kim Joong-hyun of Goodmorning Shinhan Securities in Seoul. "Although last week's U.S. interest rate cut has calmed down panic selling, a recovery from the economic woes and the financial sector's debt problems should take a long time."

The yen rose against other currencies as investors shunned riskier bets and unwound currency carry trades, while oil dropped by more than $1 to below $90 a barrel in tandem with weaker global stock markets.

"The whole market is focused on the U.S. economy, to see how bad it can get," said Tony Nunan, an energy futures trader at Mitsubishi in Japan.

Investors resumed selling after the roller coaster ride in the markets last week, when global equity markets fell because of growing despair over the U.S. economy early in the week and then rose because of a $150 billion stimulus plan.

The Nikkei ended down 4 percent as poor earnings results increased fears that the slowing U.S. economy was hitting Japanese companies. Nippon Steel surprised investors by reporting a small drop in profit for the nine months ended in December because of higher costs, sending its shares down 8 percent.

Japan's economy might be already in recession, partly because of weaker exports and sluggish consumption, Goldman Sachs said in a research report seen Monday

SHANGHAI: With fears mounting of a global economic slowdown, some analysts predict developing giants China and India, with their booming growth, will help lessen the impact.

Stock market turmoil this week triggered by fears of a US recession in the wake of a massive mortgage crisis has ignited debate over whether Asia's two rising economic stars are strong enough to power the world economy.

This directly challenges the 20th-century economic adage that when the US economy sneezes the rest of the world catches a cold.

"What is occurring is the rise of other economies to balance out those of the US -- and that has to be a good thing," said Chris Devonshire, a business consultant specialising on China and India trade.

"The US has problems but these will be offset against markets elsewhere. The new world order is working," he told reporters.

China saw scorching expansion of 11.4 per cent last year, closely followed by India's 9.4 per cent, and the prospects for both economies remain strong.

"We expect China and India to support regional growth in the event of a significant slowdown in the US," said ING Barings Asia economist Prakash Sakpal.

Such a shakeup is significant because jobs and livelihoods are at stake, but also because, as financier George Soros wrote in the Financial Times, it could signal a major shift in economic power.

"The current financial crisis is less likely to cause a global recession than a radical realignment of the global economy, with a relative decline of the US and the rise of China and other countries in the developing world."

But Zhang Ming, an economist at the Chinese Academy of Social Sciences, dismisses the notion that the Chinese and Indian economies are independent of US consumption.

"If you want to look at who is going to be the motor of global growth then you have to look at who provides the biggest market for the world's production of goods," said Zhang.

"In the short run America is still strongest. China still has a long way to go."

China, whose 3.4-trillion-dollar economy is about one-third derived from exports, could easily face economic difficulties if it were to lose the 2.5 growth percentage points garnered from trade, said Stephen Green, a Standard Chartered economist.

However, Indian exports represent only about 17 percent of its 1.1 trillion dollar gross domestic product, allowing it greater resiliency in the face of a US recession, analysts said.

"Our economy is geared to domestic demand. We are insulated so that even if there is a US recession it will not have such a direct impact on the Indian economy," said Federation of Chambers of Commerce and Industry economic adviser Anjun Roy.

But given that India's share of world trade in 2006 stood at 1.5 percent, it is not in a position to boost the world economy, Roy said, citing official statistics.

According to data published by the World Trade Organisation, China's merchandise exports last year totalled 8.0 percent of the world total, while imports stood at 6.4 percent. No cumulative figure was provided.

However, Stephen Roach, a leading economist as head of investment bank Morgan Stanley in Asia, said this week that the idea China and India could power the world economy on their own could "turn out to be a fantasy."

Roach, who is forecasting a US recession, also argued in a recent note that when the US consumer is in trouble this has great consequences for the world economy.

He calculated that the American consumer spent a combined 9.5 trillion dollars last year while Chinese only laid out one trillion dollars and Indians 650 billion dollars.

"It is almost mathematically impossible for China and India to offset a pullback in American consumption," he said.

HUNTSVILLE, Ala. (AP) — About 100 people who came from Nepal to work at a north Alabama factory seemingly vanished from a pair of apartment buildings, along with a lot of furniture and appliances, and can't be located, officials said Tuesday.

Immigration agents are trying to determine what happened to the Nepalese workers, among hundreds brought to the United States to work at a DVD factory operated by Cinram Inc., said Lauren Bethune, a spokeswoman for the Alabama Department of Homeland Security.

''We do not in any way consider it a security threat, but we do think it is important,'' she said.

A Huntsville television station, WAAY-TV, first reported on the missing workers.

Mary and Tim Snopl told the TV station they rented apartments in two buildings last fall to about 240 workers from Nepal. They were recruited to come to the United States by a company that provides staffing for Cinram.

But Mary Snopl said scores of the workers are now missing, along with hundreds of thousands of dollars worth of furniture, televisions and kitchenware.

''I don't know if they're living in Huntsville or somewhere else, I just know they aren't living with us and they aren't working at Cinram,'' she said.

Reports last fall said Cinram had hired about 1,350 foreign workers to package DVDs at its plant in Huntsville. Cinram — which describes itself as the world's largest maker of prerecorded multimedia products — said it turned to foreign workers because the area job market couldn't fill its needs.

Bethune said about 100 immigrants were believed to be missing. Agents are trying to determine exactly what type of visas they used to enter the United States.

''It's possible that they had work visas, they expired, and they went home,'' she said.

The workers can earn $8 an hour working 12-hour shifts packing DVDs in boxes. Besides Nepal, Cinram has used foreign workers from Bolivia, the Dominican Republic, Jamaica and Ukraine.

The humiliated French bank has plenty more explaining to do before putting its rogue-trader scandal behind it

AN OLD line of Hank Paulson's has been dusted off since news broke of a €4.9 billion ($7.2 billion) trading loss at Société Générale, France's second-largest bank. “We will never eliminate people doing bad things,” the former head of Goldman Sachs, now America's treasury secretary, once said. “In a town of 20,000 people, there's a jail.” The question now being asked of SocGen is: shouldn't there also be a police force?

In fact, SocGen has plenty of internal cops at its high-security headquarters in the La Défense enclave of Paris. The bank's annual report for 2006 devotes 26 reassuring pages to its risk-management practices; more than 2,000 staff worked in the function that year, and lots more bodies were added in 2007. Yet none of them stopped Jérôme Kerviel, the trader accused of taking enormous unauthorised bets, from building an unhedged €50 billion exposure to European futures markets (Mr Kerviel reportedly alleges that his supervisors were aware of his activities).

On January 28th Mr Kerviel was placed under formal investigation for abuse of trust, breaching computer security and falsifying documents. Two days later Daniel Bouton, SocGen's chairman and co-chief executive, survived a board meeting to consider his handling of the affair. He was lucky. Holes have not only appeared in the bank's accounts; its initial version of events is also looking threadbare.

ROSELAND, N.J. – Hiring at U.S. companies accelerated this month from December’s four-month low, according to preliminary data released today by ADP Employer Services.

Nonfarm private payrolls grew in January to 116.1 million, adding a seasonally adjusted 130,000 jobs compared with December levels. The increase was three and a half times the previous month’s revised 37,000-job gain, though it still fell nearly 25 percent short of November’s revised 173,000-job gain.

Looking at the above graph, one can see that the jobs are on a down ward trend but not to the point of last recession. That will take another two years...in the lap of the next President. Hopefully something will prevent that - KMG

The Carnegie Endowment for International Peace has just published an important study on

India’s Trade Policy Choices: Managing Diverse Challenges

The study

"seeks to contribute to the knowledge base upon which the Indian government and public and the country’s international trading partners can evaluate the difficult policy choices the country faces in the realm of trade. The study uses a global trade model and a national model of the Indian economy to explore the effects of a range of possible trade choices on the economy, its sectors, its workforce, and its households."

The most significant conclusions emerging from the study are the following:

1. The country’s current commitments on trade policy through institutions such as the World Trade Organization (WTO) are modest and leave broad policy discretion over tariffs and other trade measures in the hands of national policy makers. As India pursues a new multilateral trade agreement and numerous bilateral and regional trade pacts, it is moving into uncharted territory, where the decisions it makes will constrain its existing policy space and have a significant impact on the evolution of its economy.

2. Given the relatively high levels of protection in the Indian economy, it might be expected that greater opening to trade would yield large gains. However the most striking overall result of the simulations in this study is that the gains for the Indian economy from both multilateral and bilateral trade agreements are surprisingly modest. Other studies have also shown limited gains from Indian trade opening.

3. Multilateral liberalization through the WTO’s Doha Round would produce larger gains for India than free trade agreements with any of its major trading partners, including the EU, the United States, and China. Nonetheless, a Doha agreement would represent only a small gain for the Indian economy. In the simulation presented, the gain in real income for India from Doha is $1.2 billion. Other models—using dynamic modeling frameworks in which gains in investment, productivity, and overall growth are assumed to accompany trade policy changes—have shown the Indian economy gaining from $1.6 to $2.8 billion by 2020, still very modest changes.

4. Even the highest gains projected using dynamic frameworks in global models represent only about a one-quarter of one percent (0.27 percent) gain for the Indian economy. World Bank study showed gains of $2.2 billion from an ambitious Doha outcome if additional investment is also realized, but actual losses for the Indian economy from a Doha agreement when only the direct effects of Doha changes are taken into account.

5. The simulations of the effects of world agricultural price changes on the Indian economy and households suggest that the government’s concern over potential negative effects of a Doha agreement on poverty and rural development is well founded. The results presented demonstrate that the impact of world price changes on poverty and income distribution depends on the specific patterns of production and consumption in a country. Agricultural price decreases would worsen income distribution and could significantly increase rural poverty.

6. The simulations of changes in the world prices of rice and wheat show potentially significant effects on the country if it binds its agricultural tariffs at levels that would prevent it from offsetting global price shocks. For example, a 50 percent decrease in the world price of rice could have a negative impact on India’s real income as large as the positive impact of the entire Doha agreement as simulated in the study. Even a 25 percent decrease in the price of rice has negative effects on all major components of the Indian economy, including private consumption, investment, exports, and imports. Seventy-eight percent of households would experience real income losses from such a price change, and the distributional impact would be regressive, with the poorest households losing the most.

7. As a result, it would be most advantageous for developing countries such as India to have the flexibility to respond to price shocks based on their own conditions at the time of the shock, rather than having rigid or arbitrary disciplines imposed in advance. India should continue to seek an agreement on “special products” and a “special safeguard mechanism” that gives it sufficient latitude to shield its households from negative price shocks that could increase poverty and worsen income distribution.

8.The three potential bilateral free trade agreements (FTAs)simulated in this study -- with the EU, US and China -- result in smaller gains for the Indian economy than a Doha agreement and losses for Indian households. India’s imports and exports increase slightly more as a result of the India-EU FTA than under the Doha simulation. This result is perhaps surprising at first glance, but less so after considering that tariffs are completely eliminated in the bilateral agreement, whereas they are only reduced under the multilateral simulation. The deeper tariff cuts under the bilateral agreements change the resulting domestic prices more dramatically. Given that this is India’s largest trading relationship, the impact on the country’s imports and exports is understandable. However it is worth recalling that domestic production in India increases significantly less under the bilateral agreement with the EU than under the Doha multilateral agreement. This suggests that the increased bilateral trade flows do not necessarily lead to the most efficient reallocation of resources in the Indian economy. It may also be the case that some of the increased trade is trade diversion (that is, substitution of trade with the bilateral partner of trade that would have been carried out with other trading partners) rather than trade creation. India’s imports and exports increase more modestly under the FTAs with the United States and China, reflecting the fact that these are much smaller trade relationships than that with the EU. (However, a bilateral free trade agreement with the US will produce more gains for India than a similar one with China). This suggests that the Indian government should proceed cautiously with bilateral agreements. It appears that such agreements would unambiguously increase investment in the Indian economy, a welcome development, but by extremely modest amounts. However, there would be a trade-off to achieve these investments, with reductions in household welfare under free trade with the EU and United States, at least in the short term. Given the low incomes of most Indian households and the country’s high poverty rate, inflicting even short-term welfare losses on these households is not to be taken lightly.

9. Creating employment is an important goal of the Indian government, both to absorb unemployed workers, currently estimated at about 40.4 million, and also to generate opportunities for the large numbers of underemployed workers in rural areas and the estimated 7 to 8.5 million annual new entrants into the labor force. All the trade pacts simulated in this study would induce small increases in demand for unskilled labor, with a Doha agreement increasing demand by 0.9 percent (about 4 million jobs based on current employment levels). An India-EU FTA would increase demand by 0.5 percent (about 2.3 million jobs), an India-U.S. FTA by 0.3 percent (1.4 million jobs), and an India-China FTA by 0.2 percent (900,000 jobs). Although these additional positions would be welcome, they represent a very modest contribution to India’s employment needs. Clearly, employment creation will depend much more on Indian domestic demand and labor policy than on export-led growth for the foreseeable future.

10. India has liberalized its trade gradually during the past two decades while maintaining significant policy levers to achieve desired outcomes in terms of growth, poverty reduction, and income distribution. The results presented indicate that continued trade liberalization, particularly through multilateral agreements such as the Doha Round, can contribute to the country’s development and growth in the future. However it should be recognized that the gains are likely to be modest, and the possibility of negative effects is real. Trade agreements must be negotiated with great care if they are to contribute to the country’s development and broadly improve the living standards of its people.

11. Services liberalization could add to India’s potential gains, however, few offers on services of interest to india have been tabled in the Doha Round. In negotiations with the EU, significant services liberalization would be required for India to experience net gains in real income to the overall economy as well as to offset losses to households.

Thus, the results of the study indicate that continued trade liberalization, particularly at the multilateral level, can contribute to India’s growth and development. However it must be recognized that the potential gains are modest and the risks are not insignificant. Balancing the defensive interests of India’s poor households with the quest for improved efficiency and market opportunities will require careful trade negotiations and appropriate complementary measures.

The moral: Both Doha and bilateral pacts require careful negotiation if India is to realize the modest gains on offer and avoid risking large negative effects on housholds of the poor. However, there is a need for a separate study on the benefits of a free trade agreement in services between India and the EU, India and the US and India and China.

Inflation is China's next export
By Wei Gu
Reuters
Friday, January 11, 2008

HONG KONG: Politicians in the United States might soon regret what they have been wishing for.

Having long accused Beijing of manipulating its currency to keep Chinese exports inexpensive, thus gaining an unfair trade advantage, Americans might find a troublesome new export from China: inflation.

The manufacturing sector in China can no longer offset rising prices with productivity gains because of the combined gains in the yuan - up 3 percent against the dollar in the past two months - as well as food, energy and other raw material price increases that have pushed domestic inflation to 11-year highs.

Efficiency at listed manufacturing companies in China peaked last year and has already started to deteriorate. On top of that, Beijing is considering letting land and other resource prices rise to market levels, while a more stringent labor law that took affect this week will surely push up labor costs. The question is, will China be able to pass on higher costs to global consumers?

"China's export prices were rising in the last quarter even though U.S. import prices have slowed," said Paul Cavey, the head of China economics at Macquarie Securities. "That does suggest that China does have a bit of pricing power."

What a change from the past five years. During that period China was a deflationary force, helping keep global prices low.

To be sure, Chinese exports to the United States are still slightly cheaper than they were in 2003, according to U.S. government figures. But the trend is clear. Prices have started to climb in the past year, and increases are likely to accelerate in 2008.

Underlining its concern about inflationary pressures, China's cabinet said Wednesday that it would temporarily intervene to curb price increases in necessities like food.

All this should not come as a big surprise. China cannot push the productivity envelope forever. Eventually, the law of diminishing returns will prevail. When inflation hits a country that is a global factory, the rest of the world pays more.

"When China starts to export inflation, it will feed through the rest of the world," Dong Tao, an economist at Credit Suisse, said.

Hong Kong, which gets most of its groceries and electricity from the mainland, is already feeling the heat. From food to furniture, wages to rent, almost everything is rising in the city. To add fuel to the fire, Hong Kong has to follow the Federal Reserve Board in cutting rates because its currency is pegged to the dollar. As a result, Tao expects Hong Kong inflation to average a surprising 5.1 percent in 2008, while most other analysts say it will be closer to 3.3 percent.

Western consumers will see prices jump for electronics, clothing and toys, although these gains will be masked slightly since manufactured goods account for a relatively small part of the consumer price index baskets in the United States and European Union.

Barring any policy mishaps, exported inflation from China should not rock those economies, although it comes at an inopportune time when the United States is battling a slowing economy, oil hovering around $100 a barrel, and a still-unfolding credit crisis.

In the interest of the West, and arguably for the benefit of China, Beijing seems to be heeding the advice from the West to let its yuan appreciate more rapidly. After raising interest rates six times in 2007, China seems to have decided that a faster rise in the yuan is the best monetary policy to fend off inflation.

"Beijing appears to be seriously looking at the right policy tool to deal with the rising inflation threat," Frank Gong, JPMorgan's China economist, said.

If the yuan strengthens by 10 percent in real terms, consumer inflation in China will be reduced by 0.8 percent in the near term and 3.2 percent in the long run, Jiming Ha, the chief economist of China International Capital, said. Ha expects the yuan to appreciate a full 10 percent in 2008, after rising the same amount in the two and a half years after the one-time revaluation.

Western politicians should be pleased. They have been demanding a faster rise in the yuan. But this is also a U.S. election year. Presidential hopefuls are all too aware that U.S. consumers, suffering from a housing meltdown, could be incensed by higher prices on products from China. Do not be surprised if U.S. lawmakers and presidential candidates soon start to rail against the inflation threat coming out of China. But unlike the yuan, inflation is not something that can be easily tamed by any government.

The risk is that Beijing might panic and step on the brakes too hard, and that could hinder global growth at a time when central banks elsewhere are easing monetary policy.